Brian R. Beggs is currently Director of Acquisitions for Block Real Estate Services and a Principal in all of the Block Funds. He joined Block in January of 2003 as a financial analyst and helped start the Block Funds in July of 2004. Over the past five years, the Block Funds have raised over $55 million of equity and acquired over $200 million of commercial property. Brian has personally been involved in property acquisitions totaling over $400 million. Prior to joining Block, Brian worked as a stock equity analyst for a locally based Registered Investment Advisor.
The lack of lending in commercial investment real estate has been a large contributor of plummeting values over the past 24 months. When do you anticipate lenders becoming active again?
We are starting to see lenders become active in the market right now for quality real estate and quality borrowers. Our mortgage brokers are telling us there is money to lend out there, but the underwriting is much different than it was 24 months ago. Current loan terms are 55%-65% LTV with rates in the 6.5%-7% range. Fannie and Freddie have continued to stay active during the credit freeze which explains why multi-family deals were getting done over the past 24 months.
How much further will commercial real estate values deteriorate over the next 24 months?
Commercial real estate is not like the stock market. I can’t say how much more values will decline if any, but I do know that real estate is a cyclical industry. If you buy functional real estate that is well located, your values will not deteriorate near as much. And your assets should be the first to come back once the market returns. Once debt financing starts to flow again and a few more deals get done so there are comparable sales, transaction volume will pick up. I personally think cap rates have stabilized and rents are close to stabilized in most markets we track, so any further value loss in commercial real estate should be minimal. The only owners that get hurt in times like this are the owners who are forced to sell. Long-term owners like us look for advantages in times like this.
Have you made any purchases lately? If not, when do you anticipate an increase in acquisitions for Block Funds?
We are looking at many deals, but we haven’t made a purchase this year. We have capital commitments from our investors in our 4th Fund but have yet to call most of the money because the deals we have seen so far to date don’t fit our risk adjusted return criteria. The good news is we are starting to see some sellers, especially banks, become more realistic with their pricing expectations. As those sellers are forced to sell, our acquisition activity should increase.
What types of assets are you targeting? What markets?
Our firm is unique in that we will look at any type of real estate deal where we can make money. While the Funds mostly acquire income-producing, stabilized real estate deals, we have other pools of money where we look to acquire partially or 100% vacant buildings where we think we can come in and add value. Some buildings are only vacant because the owner doesn’t have any capital to make new leases. If a well capitalized owner buys that asset, they have the potential to make a lot of money. Other buildings are vacant because they are poorly located or are functionally obsolete. Obviously those are the buildings we want to stay away from. Right now I would say the top three markets we are looking in are Kansas City, St. Louis, and Phoenix, but we will go almost anywhere if the deal is compelling.
How has your underwriting changed over the past 24 months?
It is more consistent with what the space markets are doing. When times are good and the markets are in favor of the landlords, we can underwrite increasing rents and lower vacancies. The reverse is true in times like today where tenants have most of the control when negotiating a lease deal.
In 2008, you attended the Final Four and your seat was just barely cut from the “Mario’s Miracle” cover of Sports Illustrated. Will your Jayhawks make the Final Four this year? If so, do you plan on attending?
I think they will make the Final Four especially since Cole and Sherron have been there before and that experience will really help them once the tournament begins. It does take some luck getting there however, and the best team does not always make it. So I plan on going to the Sweet 16 and Elite 8 in St. Louis if KU is playing there. If they make the Final Four, I will do exactly what I did in ’08, which was watch the Saturday games here with a bunch of people. If they go to the Championship game on Monday night, I’ll be in Indy!